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Monday, 22 April 2013

How often should you switch your superannuation sector allocations?

A friend was recently asking me for advice on what they should change their superannuation sector allocations to. They are not the most financially literate person so I was interested in the fact that they put that much thought into their allocation strategy. I confess that I have neverchanged my superannuation strategy after enrolling in it because as I have said before I use superannuation as a 'set and forget' type investment strategy.

However, my friend (rightly) pointed out to me that their superannuation was their largest investment and shouldn't they therefore be looking to maximise their investment return? I couldn't argue with this however there are some things you should consider.

What are you making your sector allocation change based on?

I am going to assume for the purposes of this post that you do not have a self managed super fund (SMSF) because the decisions you make in a SMSF are exactly the same as ones you would make in your normal investment portfolio - it is just a different structure. I am going to assume that you are like most people who put their money with a superannuation provider and who are able to choose various strategies or plans.

I completely understand the desire to maximise your superannuation returns - after all, as my friend pointed out it is the largest investment that most people have when they go into retirement. However you need to make sure that you are making changes for the right reasons.

The biggest mistake that people make (and the biggest danger in switching) is that you sell low and buy high

That is, you look at your superannuation returns and notice that one class of investment has performed for you much better than other classes of investments and you switch from the badly performing investment into the one that has performed well. The danger in this is that you buy into the investment class that has already had it's runand sell out of the one that could be about to pick up.

If you are going to make a sector allocation switch it should be because you believe that the particular sector you are switching into is going to perform well (note one that has already performed well).

What does it cost you to switch your sector allocations?
Some superannuation funds will allow you to switch as much as you would like with no costs, while others allow a certain number of switches free of charge and then charge you for every switch after that and some charge you for every switch you make.

Make sure you know what you are going to get stung for and if you are going to get charged for switching make sure you keep track of how much your switching is costing you.

Make sure your allocations are appropriate for your stage in life
As a young person, I can have a reasonably aggressive approach to my superannuation and have it all in high growth options versus someone who is a bit older than me, who is getting close to retirement and for whom security of capital value is more important than achieving growth (which comes with the risk of capital depreciation).

What this means is that although a 'set and forget' strategy is not always a bad one because it helps you avoid the buy high sell low momentum trading type mistakes, you do not want to have the high growth strategy that you put in place in your 20s still in place when you are getting into your 40s and 50s.

So...how often should you switch?
Switching is inherently trying to time the market. Although this is generally a bad idea, if you truly feel that the share market is overvalued or undervalued (and the same for property, bonds or any other investment class) then you should consider switching your asset allocation to what you believe is relatively undervalued.

I would think that switching your allocations any more than 3 or 4 times a year is overkill.

Relative returns do not swing that much in a single year and you are probably missing the natural ups and downs that come with the market.

So how often (if ever) do you switch your sector allocations? I would love to hear how much you think about your superannuation.